The Way To Address the Debt Limit Is — Yes — To Cut Medicare and Social Security

That’s the view from Libertarian Land, our columnist reports.

AP/Patrick Semansky, file
The Social Security Administration's main campus at Woodlawn, Maryland in 2013. AP/Patrick Semansky, file

The United States currently limits the federal debt to $31.4 trillion. Borrowing hit this limit on January 19, but the government will not default until at least July due to various “extraordinary measures.” If default occurs, a major financial crisis is likely. How should the United States respond? 

By cutting Social Security and Medicare. The United States is on an unsustainable fiscal path. Projections from the Congressional Budget Office show that under current policy, the debt-to-GDP ratio increases without bound. This means increasing borrowing costs, greater difficulty in rolling over the debt, and eventually fiscal and financial meltdown.

Projections are not perfect, but since the early 2000s, CBO’s forecasts have, if anything, been too optimistic. The country might seem to have three options to avoid default: increased growth, higher taxes, or reduced expenditure. 

In practice, faster growth and higher taxes are non-starters. Changes in policy that increase growth are desirable, but to avoid default, they would have to spur growth beyond anything in the historical record.

Higher taxes can reduce deficits to some degree, but sufficiently large increases would slow economic growth and, on a net basis, be counter-productive. Cutting spending is therefore the only feasible approach to avoiding fiscal Armageddon.

Medicare and Social Security, moreover, are precisely the programs to cut. This starts from the fact that both are large (11.4 percent and 17.2 percent of federal outlays, respectively). More importantly, both programs are projected to grow consistently at a faster pace than GDP. This excessive growth reflects the aging of the population (for both programs) and excess health cost inflation (for Medicare).

Military expenditure is also large (12.0 percent of federal outlays), but it has been declining relative to GDP over the post-WWII period. Other discretionary spending (14.7 percent of federal outlays) has been stable relative to GDP and is less subject to the pressures that grow Social Security and Medicare.

As a matter of arithmetic, therefore, any plan to slow the debt must cut Medicare and Social Security (plus other federal health programs, like Medicaid and Obamacare, that also grow due to excess health cost inflation).

The good news is that cutting these programs is the right policy, regardless of fiscal balance. Social Security discourages savings, by promising beneficiary retirement funds, and lowers labor supply, by incentivizing early retirement.

Savings and retirement are private choices on which government should take no stand. If anything, policy should encourage savings. Retiring while still healthy and productive is fine if self-financed, but Social Security encourages early retirement on someone else’s dime. 

Despite these costs, society might wish to help those elderly who cannot easily provide for themselves. That, however, is an argument for disability insurance, not a program that pays retirement benefits to all.

Medicare causes excessive consumption of health care by lowering the price to consumers. This increased demand implies higher costs, and government involvement creates complicated pricing schemes and regulation, which misaligns incentives for patients and providers.

Again, despite these costs, society might wish to subsidize elderly health care. That view, however, suggests policies that provide catastrophic coverage, not reimbursement of most health care expenditures. The good news is that policymakers can scale back Social Security and Medicare in ways that achieve solvency while retaining protections for the elderly.

Social Security and Medicare can phase in higher ages of eligibility. When the United States adopted Social Security in 1935, the age of eligibility was 65 even though life expectancy was only 63. Thus Social Security was protection against outliving one’s earnings ability, not a subsidy for extended retirement. Similarly, life expectancy has increased substantially since the creation of Medicare in 1965.

A more fiscally responsible Social Security would also cap benefits at their current level (with inflation adjustments going forward), rather than increasing benefits perpetually along with wage growth (current practice). This puts a floor under the elderly standard of living but reduces expenditure growth over time. 

Medicare can introduce higher deductibles and copays. This reduces expenditures directly, incentivizes balancing the costs and benefits in health care decisions, and shifts the program toward catastrophic coverage only. Those who experience major losses can fall back on disability and Medicaid.

This is unfortunate for those affected, but the approach balances providing a safety net against bankrupting the government. Reasonable people can favor a government safety net for the elderly. Unaffordable programs, however, make no sense, and even affordable ones can be excessive.


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